The Usefulness of Accrual Accounting in Forming Analysts’ Forecasts of Accruals and Cash Flows from Operations
41 Pages Posted: 14 Sep 2020 Last revised: 15 Jul 2021
Date Written: May 2, 2020
Recent work shows that the role of accrual accounting in mitigating the timing differences between cash flows and operating performance has been disappearing over time (Bushman, Lerman, and Zhang 2016). We argue that even though there is noise in the accrual accounting process, financial analysts–as sophisticated users of financial information–are able to extract useful information from this process. Analysts use the information extracted from accrual accounting in their forecasting process to smooth the timing differences in forecasted cash flows and to predict future reported cash flows. Consistent with the argument, we find that the analysts’ forecasts of accruals and cash flows are negatively correlated and this negative correlation has not changed over time. Further, the ability of analysts’ accrual forecasts to predict future cash flows has not declined over time.
Keywords: Accrual accounting, analysts’ cash flow and accrual forecasts, accrual quality
JEL Classification: M40, M41, G12, G14
Suggested Citation: Suggested Citation